P A R T P A R T Commercial Paper Negotiable Instruments Negotiation & Holder in Due Course Liability of Parties Checks and Electronic Transfers 7 McGraw-Hill/Irwin.

PART

PART

Commercial Paper

Negotiable InstrumentsNegotiation & Holder in Due Course

Liability of PartiesChecks and Electronic Transfers

7

McGraw-Hill/Irwin Business Law, 13/e

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Negotiation & Holder in Due Course

PA ET RHC 32“Behind all its global

responsibilities and impersonal style banking is still a ‘people business’…it may be the most personal business of all for it

always depends on the original concept of credit, meaning

trust.”

Anthony Sampson, The Moneylenders: Bankers in a Dangerous World (1981)

Learning Objectives

Negotiation IndorsementsHolder in Due Course & Rights

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Under UCC Revised Article 3, negotiation is the transfer of voluntary or involuntary possession of a negotiable instrument by a person (other than issuer) to another person who becomes its holder [3–201]

Instrument may be: Order paper: “to order of named payee” Bearer paper: “to bearer” or “to cash”

Overview

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Indorsement: Signature, alone or with words, made on an instrument for a specific purpose May not be that of maker, drawer, acceptor Indorsement required for negotiation except in

the case of depositary banks Form of indorsement may affect attempts to

negotiate the instrument further Indorsement may be subject to rescission due

to, e.g., lack of capacity, fraud, illegality

Indorsement

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A special indorsement is indorser’s signature and words to whom instrument is payable

Instrument indorsed in blank if indorser signs without specifying to whom it’s payable

Restrictive indorsement states purpose of the indorsement or how instrument to be used

Kinds of Indorsement

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Holder in due course: person holds negotiable instrument, taken for value, in good faith, without notice of defects or evidence of apparent forgery or alteration that raise questions about authenticity

Takes negotiable instrument free of personal defenses, claims to instrument, and claims in recoupment of obligor or of a third party

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Holder in Due Course

Overdue, dishonored, or has uncured default

Contains unauthorized signature or alteration

Has a property or possessory interest claim

Has any defense against it or claim in recoupment to it

Negotiable Instrument Defects

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Article 3 shelter rule: instrument transferee obtains all rights transferor had, including right to enforce instrument and any right as holder in due course [3–203(b)]

Revised Article 3 establishes four categories of claims and defenses: Real defenses attack instrument’s validity

and may be used as reasons against payment of a negotiable instrument to any holder

Holder in Due Course Rights & Limitations

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Revised Article 3 categories (continued): Personal defenses: legal reasons to avoid or

reduce person’s liability for payment of negotiable instrument due to the transaction

Claims to an instrument concern property or possessory rights in instrument or proceeds

Claims in recoupment arise from transaction that created the instrument and offset, rather than prevent, liability

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Holder in Due Course Rights & Limitations

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Commercial Paper Chart

Holder in due course rules may harm consumers, thus some states and the Federal Trade Commission limit holder in due course rule as it affects consumers

FTC requires sellers who extend credit by note to include a statement warning of limited holder in due course rights

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Consumer Protection Issues

Test Your Knowledge

True=A, False = B Order paper is a negotiable instrument

payable to the order of cash. Indorsement is a signature that is made

on an instrument for a specific purpose If Jamil writes a check to Mary, Jamil may

indorse the back himself to negotiate it. A check is rendered non-negotiable if it is

indorsed on the back, “For Deposit to Account #5000005 at First State Bank.”

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Test Your Knowledge True=A, False = B

Indorsement is required for negotiation except in the case of depositary banks.

The shelter rule states that a transferee of a negotiable instrument obtains all rights that the transferor had.

Megan writes Tisha a check dated 1/2/2007. Next day, Tisha indorses the check to Bryan’s Grocery. Bryan’s presented the check for payment to Bank on 7/1/2007. Bank must honor the negotiable instrument.

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Test Your Knowledge Multiple Choice

Dan (16 years old) signed an installment note with Dude’s for a surfboard. Dude’s sold the note at a discount to Factors Co. The board broke after 1 month and Dan stopped paying. Factors Co. is: (a) a holder in due course, but Dan is a

minor and may assert his status to void the contract

(b) not a holder in due course & has no rights

(c) is a holder in due course and Dan must pay on the note or breach the contract

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Test Your Knowledge

Multiple Choice Requirements for holder in due course

status include: (a) take a negotiable instrument for value (b) take the instrument in good faith (c) take without notice of defects or

claims against the instrument (d) all of the above (e) all of the above plus be in the

business of taking negotiable instruments32 - 17

Thought Questions What do you think of

the FTC rule limiting the rights of a holder in due course in consumer transactions? Do you think the FTC rule achieves the underlying policy to protect consumers?

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